Thursday, April 11, 2013

Little League Egos

Yesterday, I read the minutes from last month's Federal Open Market Committee meeting: And I am excited to report that I have discovered the one key ingredient our Fed officials are missing. If they'd add this one thing to the mix, if, in fact, they'd make this the single main ingredient, I'm certain we'd see things improve at a much healthier pace. The ingredient; humility.

Here are three excerpts, each followed by my commentary:

Many participants noted that in the current low-interest rate environment, investors in some financial markets were taking on additional risk—either credit risk or interest rate risk—in an effort to boost returns. As a result, vigilance on the part of policymakers and regulators was warranted, especially in light of episodic strains in European markets.

The Fed has succeeded in destroying any real return from high quality fixed income investments. Thus, in an attempt to generate yield without depleting their principal, investors are taking on risk they otherwise wouldn't---risks that many do not understand. Policymakers, therefore, fearing their actions could culminate in substantial losses to unsuspecting investors, must keep a watchful eye over financial markets and stand ready to step in (make no mistake, they will bailout "systemically important" institutions in a heartbeat), and up the stimulus, if need be.

Pointing to academic and Federal Reserve staff research, most participants saw asset purchases as having a meaningful effect in easing financial conditions and so supporting economic growth.

Pointing to research performed by Keynesian-biased academics, and the Fed's own researchers, "most participants" have zero faith that the economy can heal itself---that markets could resume functioning after a crisis without intervention. Like the Native American rain dancers, who knew that their particular routine always brought the needed rain---who, that is, never stopped dancing until it started raining---they'll remain oblivious to the fact that their elaborate choreography is doing little more than weakening the ground beneath their our feet. If the economy does not recover (if it cannot withstand all the engineering), all they'll know is that they didn't dance hard, or fast, enough.

Voting against this action: Esther L. George. Ms. George dissented because she continued to view monetary policy as too accommodative and therefore as posing risks to the achievement of the Committee’s economic objectives in the long run. In particular, the current stance of policy could lead to financial imbalances, a mispricing of risk, and, over time, higher long-term inflation expectations. In her view, the Committee’s asset purchases were providing relatively small benefits, and, given the risks that they posed as well as the improvement in the outlook for the labor market, she thought they should be wound down.

When my boys were little I helped coach their Little League teams, mostly because I had little faith in some of the other dads' "coaching" abilities. Not that I was some baseball expert (I wasn't!). I volunteered so as to mitigate the potential damage done by over-zealous dreamers who cared more about their Peewee League win/loss record, or their own sons' future MLB prospects, than they did about creating an environment where kids could learn team work, could take risks, take lumps, learn how to win, and, most importantly, learn how to leverage losing experiences to become better players and ultimately better people. Perhaps Ms. George---the one member making some sense (to me)---joined the FOMC to bring a little humility to the process. I suspect she's a bit frustrated...